[2023] KETAT 272 (KLR)

Noon Works Limited v Commissioner of Investigations & Enforcement (Tax Appeal 448 of 2022) [2023] KETAT 272 (KLR) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 272 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 448 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

May 26, 2023

Between

Noon Works Limited

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability Company duly incorporated and registered in Kenya under the Companies Act. The Appellant’s primary activity is in real estates business.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. The Authority is an agency established for the purposes of assessing, collecting and accounting for tax revenues.

3. The Respondent vide a letter dated 15th May 2020 notified the Appellant of investigations on it in relations to non-remittance of taxes from the year 2015. The Appellant replied on 23rd May 2020.

4. Following many exchanges of correspondences and documents between the parties in form of letters, emails, meetings and telephone conversations, the Respondent on 3rd September 2020 in company of the representatives of the Appellant visited Viraj Court Apartments in Pangani area in Nairobi which is owned by the Appellant.

5. On 22nd September 2020 vide an email the Respondent requested for additional documents to which the Appellant replied on 24th September 2020.

6. There were various exchange of emails, letters and visits by the Respondent’s representatives to the Appellant offices that followed and subsequently the Respondent vide a letter dated 22nd April 2021 requested for additional information and documents. The Appellant replied on 3rd May 2021.

7. Vide a letter dated 11th May 2021 and received by the Appellant on 24th May 2021, the Respondent served the Appellant with its preliminary findings. The Appellant replied to this on 2nd June 2021. Following this reply, a meeting between the parties was held on 7th July 2021.

8. The Appellant submitted documents as agreed in the meeting vide a letter dated 4th August 2021. The Appellant further wrote to the Respondent vide letters dated 27th September 2021 and 26th November 2021.

9. The Respondent issued the assessment letter dated 8th December 2021 together with assessment orders for a total amount of Kshs. 38,330,963. 76 including penalties and interest for the period January 2015 to December 2019.

10. The Appellant objected to the assessments vide a letter dated 5th January 2022 objecting to the entire assessment. This was followed by another letter by the Respondent dated 4th March 2022 but indicated by the Appellant as received on 11th March 2022 requesting for additional documents to which the Appellant replied on 17th March 2022.

11. The Respondent issued its objection decision on 23th March 2022.

12. Aggrieved by the Respondent’s decision the Appellant lodged the Notice of Appeal on 21st April 2022.

The Appeal 13. The Appeal is premised on the following grounds as stated in the Amended Memorandum of Appeal dated and filed on 21st November, 2021:-i.The Respondent erred in law and in fact by, ultra vires issuing a further communication and a subsequent Objection decision outside the stipulated Sixty (60) days from receipt of the Appellant's objection of 5th January 2022, contrary to Section 51(11) of the Tax Procedures Act.ii.The Respondent erred in law and in fact by ultra vires issuing the Appellant with a late communication on 11th March 2022 and the subsequent Objection decision on 23rd March 2022, contrary to Section 51(11) of the Tax Procedures Act, whereas it was obligated to issue the same on the Appellant on or before 4th March 2022. The Objection decision is therefore null and void Ab lnitio.iii.The Respondent erred in law and in fact by ultra vires issuing a late Objection decision, contrary to Section 51(11) of the Tax Procedures Act, and failed to consider that the Appellant's objection must be deemed allowed when it failed to make its decision or any other communication within the statutory Sixty (60) days window.iv.The Respondent erred in law and in fact by rendering its Objection decision by failing to consider the detailed reasons in its objection and only making a generalized Objection Decision, which decision failed to include a detailed statement of its findings on the material facts and reasons for the decision contrary to Section 51(10) of the Tax Procedures Act.v.The Respondent erred in law and in fact through its Objection decision that found that the Appellant is required to pay an additional tax of Kshs. 38,054,963. 91/= (principal tax plus penalties and interest) by ignoring the Appellant's submissions throughout the audit, which included the interviews, review meetings, site inspections, document verification meetings, submission of all supporting documents, interviews of tenants, suppliers and workmen.vi.The Respondent erred in law and in fact by failing to consider Section 3 (2) (a) (iii) of the Income Tax Act. The Appellant has relied on Section 6 &15 of the Income Tax Act in preparing its taxable income and declare such tax computed.vii.The Respondent erred in law and in fact through its Objection decision that the Appellant under declared its rental income by Kshs. 45,287,108. 00 upon disregarding the Appellant's valid supporting documents such as the tenancy agreements, rent receipts, rent schedules, iTax rental income returns, which documents meet the threshold of Section 15 of the Income Tax Act and Section 54A of the Income Tax Act.viii.The Respondent erred in law and in fact through its Objection decision that disallowed the Appellant's repairs and maintenance costs to the tune of Kshs. 12,187,933. 00 upon disregarding the Appellant's valid supporting documents such as the repairs and maintenance schedules, individual repairs and maintenance receipts and petty cash payment vouchers, which documents meet the threshold of Section 15 of the Income Tax Act and Section 54A of the Income Tax Act.ix.The Respondent erred in law and in fact through its Objection decision that disallowed the Appellant's salaries and wages costs to the tune of Kshs. 4,857,320. 00 upon disregarding the Appellant's valid supporting documents such as the payment vouchers, salaries and wages monthly schedules, NSSF and NHIF returns plus payment slips, master roll books and P11 payment slips, which documents meet the threshold of Section 15 of the Income Tax Act.x.The Respondent erred in law and in fact through its Objection decision that disallowed finance cost to the tune of Kshs. 7,318,675/= upon disregarding the Appellant's valid supporting documents such as the telegraphic transfers refunding the loan and the withholding tax certificates generated on iTax.

The Appellant’s Case 14. Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal.i.The Appellant’s Statement of Facts dated 4th May 2022 and filed on the same date together with the documents attached thereto.ii.The Appellant’s Amended Statement of Facts dated and filed on the 21st November 2022 together with the documents attached thereto.iii.The Appellant’s written submissions filed on 16th December 2022.

15. The Appellant submitted that it was the developer of Viraj Court Apartments in Pangani area. That it lets out the apartments to the general public under the terms set out in its tenancy agreement with each tenant. That it had in some instances sold some of its apartments and had no other properties apart from this one. That the Appellant receives monthly rental income varying from tenant to tenant depending on the location, size and nature of the leased premises.

16. The Appellant averred that on the 8th May 2020, the Respondent's officers, carried out an impromptu visit to the Appellant’s premises and spoke to various tenants of the Appellant. That some of the information sought from the Appellant's tenants included, but was not limited to:a.The size of the houses,b.The monthly rent being paid by them to the Appellants.c.The offices of the Appellant.d.The total number of apartments/houses at the premises.

17. That on 15th May 2020, the Respondent sent a letter of notice to the Appellant informing it that it was under investigations for non-remittance of taxes.

18. That on 23rd May 2020, it wrote back to the Respondent and informed it that it had at all times correctly and accurately declared its rental income and all taxes due were paid as required. That it welcomed the Respondent to carry out its investigations and assured it of its full support and cooperation. That in fact, the Appellant indicated that it had overpaid its taxes and had even previously written to the Kenya Revenue Authority with this regard on several occasions.

19. The Appellant submitted that the Respondent emailed it the following day, 27th May 2020, to inform it that it shall be arranging a virtual meeting in due course as a result of the Covid-19 Pandemic.

20. That on 5th June 2020, as the Respondent had not requested for a meeting, it wrote to the Respondent pleading to have the matter concluded expeditiously bearing in mind that the management was required to focus on the effective running of its business. That furthermore, it was suffering from the negative perception created by the Respondent and grappling with the economic effects of the Covid-19 pandemic.

21. That on 15th June 2020, the Respondent emailed the Appellant and informed it that it would be setting up a meeting as per its request in due course.

22. That on 3rd July 2020, the Appellant sent another reminder to the Respondent as there was no response and a meeting had not yet been arranged as promised.

23. That on 6th July 2020, the Appellant received a phone call from the Respondent during which the Respondent advised the Appellant that, since the Respondent was busy with other end of financial year responsibilities it had been unable to proceed with the audit. That it promised to send communication by the end of that week. That the Appellant requested that it be given a date when the Respondent could visit its offices to carry out the audit. It averred that this would ensure that it has all supporting documents available for their inspection.

24. That on 10th August 2020, as there was still no response from the Respondent, the Appellant once again wrote to the Respondent requesting for a conclusion of the audit, which after four (4) months, was not showing any signs of progress to the Appellant's detriment.

25. The Appellant stated that on 13th August 2020, the Respondent made a phone call to the Appellant with regards to its email of 10th August 2020. That the Appellant expressed its displeasure and pleaded with the Respondent to complete the investigations expeditiously to enable the Appellant engage in the effective running of its business especially with the difficulties being experienced during the Covid-19 pandemic.

26. That same evening, in a turn of events, the Respondent summoned the Appellants directors with claims of fraud and culpability of an unknown offence. That the Summons required the Appellant’s directors to appear before the Respondent on Wednesday,19th August 2020 at 9:30am at its Ushuru Pension Towers, Upper Hill offices in Nairobi.

27. That on 19th August 2020, the Appellant’s directors, accountant and manager appeared before the Respondent and answered all its queries relating to the Appellant and its affiliate/related companies. That the Respondent made enquires, inter alia, with regards to:a.The nature of business it carries out.b.Its directors.c.The properties it owns including their locations and their names.d.The size of houses on each property.e.The monthly rents at which the houses were being offered to the general public;f.The company's bankers.g.Details of how the properties were acquired.h.Other miscellaneous information asked for as they conducted the interview.

28. That the Appellant answered all the queries raised by the Respondent. Some of the responses given during the interview were, inter alia that:-a.The Appellant owned Viraj Court Apartments in Pangani area, which it constructed over 15 years ago.b.The Appellant was receiving monthly rents ranging between Kshs. 23,000/= to around Kshs. 40,000/= based on their locations and sizes.c.The Appellant enters into tenancy agreements with all its tenants, with agreement runs for a term of 11-months.d.That the Appellant has sold a number of houses since constructing them over 15 years earlier.

29. That on 24th August 2020, the Appellant wrote to the Respondent and served it with a copy of the Court Order dated 25th March 2015 as requested in the meeting of 19th August 2020.

30. That on 26th August 2020, the Respondent called the Appellant's director requesting for a date on which it could visit all the properties belonging to the Appellant. The Appellant requested the Respondent to combine all the site visits of all the related company's so that the process can be faster.

31. That on 28th August 2020, the Appellant emailed the Respondent informing it of its availability for the site inspections on 2nd September 2020 and if need be, could be extended to 3rd September 2020.

32. That on 3rd September 2020, the Appellant in the company of the Respondent visited Viraj Court Apartments in Pangani area which is the only property it owns. During the site visit, which involved the Appellant's representatives and the Respondent's representatives, the parties engaged in, inter alia;a.Obtaining information on the number of apartments on the property.b.Obtaining information on the size of apartments.c.Obtaining information on the number of empty apartments.d.Obtaining information on the nature of and extent of repairs and maintenance.e.Viewing of empty apartments on each property.f.Interviewing tenants residing on the properties.g.Interviewing workmen found at the premises.h.Taking photos of the properties, assets thereon and on-going renovations.i.Obtaining information on issues, disputes or challenges that the Appellant normally encounters.

33. That on 31st August 2020, the Respondent wrote to the Appellant and its related companies requesting for the following documents;a.Bank account details for all the companies and their directors.b.Audited accounts and tax computation.c.General ledgers.d.Sale agreements for all the properties it had sold.e.Rent schedules for all its developments.f.Breakdown of cost of repairs.g.Purchase agreements for the properties it purchased.h.Loan agreements and loan repayments schedules for both local and foreign loans.i.Fixed assets revaluation/ reclassification reports.j.Fixed asset schedules.k.List of debtors and creditors.l.School fees (income stream) schedules.

34. That on 7th September 2020, the Appellant responded to the Respondent's request for the documents dated 31st August 2020 and attached thereto the following documents;a.The Appellant's bank account details.b.The Appellant's directors bank account details.c.The audited accounts and tax computations from December 2014 to December 2019. d.General ledgers from 2014 to 2019. e.Sale agreements for the properties sold during the audit period.f.Rent schedules from 2014 to 2019. g.Breakdown of costs of repairs from 2014 to 2019. h.Fixed assets schedules from 2014 to 2019. i.List of debtors and creditors from 2014 to 2019.

35. That on 22nd September 2020, the Respondent wrote an email to the Appellant seeking further details. It requested for;a.Details of a tax credit carried forward in 2015 amounting to Kshs. 954,936. 00. b.Borrowings for the years under review.c.Evidence of the expenses claimed over the years for the items that were listed thereon.

36. That on 24th September 2020, the Appellant wrote to the Respondent to respond to its further request of 10th September 2020. The Appellant responded to the issues by;a.Providing a clarification that the amount of Kshs. 954,936/= was carried over to 2015 from the tax overpaid in 2014. b.Clarifying that the company's borrowings were made before the Respondent's seizure of its documents in 2011 and no borrowings were made during the audit period 2015-2019. c.Requesting that the Respondent to physically verify the expenses at their offices due to the bulky nature of the documents.

37. That on 30th September 2020 and 1st October 2020, the Respondents' officers, Ms. Jackline Mwangi and Mr. Eric Riungu visited the offices of the Appellant and reviewed all tenancy related documents which included the rent schedules, lease agreements, ID copies, rent payment receipts, tenant's PIN numbers, tenant's deposits payments, tenant's personal profile, tenant's deposit refund vouchers upon moving out and all expense receipts as incurred by the Appellant throughout the audit period.

38. The Appellant stated that during the document inspection visit at the Appellant's offices, the Respondent requested that due to the huge volume of documents, the process of looking at each and every document would be cumbersome and time consuming, and it therefore required the Appellant to provide it with an item-by-item spreadsheet schedule, which it would review whilst at its own offices having already perused the originals, in_situ.

39. That on 16th October 2020, as requested by the Respondent's officers, the Appellant emailed all the excel schedules for repair and maintenance expenses towards; masonry expenses, metal works, painting expenses, plumbing expenses, woodwork expenses, electrical expenses, garbage expenses and landscaping expenses

40. That as at 14th December 2020, as the Respondent did not make any further communications, the Appellant assumed that it was satisfied with the documents provided and the Appellant wrote to the Respondent asking it to complete the audit as all queries had been adequately addressed.

41. That on 17th December 2020, the Respondent wrote back to the Appellant asking it to be patient and assured it of its commitment to resolve the issue quickly.

42. That on 22nd April 2021, the Respondent wrote an email to the Appellant requesting it for additional information and documents. The information requested was:a.Audited accounts and ledgers for the year 2011 to 2013. b.The source of funds for the development/purchase of the property.c.Movement of the money leading to the foreign exchange loss.d.All loan and borrowing details from 2011 to 2013.

43. That on 3rd May 2021, it wrote to respond to the Respondent's emails of 22ndApril 2021 and responded by:a.Informing the Respondent that it was requesting for documents beyond the audit period contrary to its undertaking that it would not do so.b.Informing the respondent that it is only obligated under the law to retain documents for a period of 5 years.c.Informing the respondent that the premises was built several years ago as was indicated during the site visit of 3rd September 2020, and the finding thereof, beyond its audit scope.

44. That on 11th May 2021, the Respondent sent to the Appellant its preliminary findings but which it received on 24th May 2021. That the Respondent's findings purported that:a.It had used a banking method to arrive at a variance of the expected rental income as compare with the declared rental income. The purported variance amounted to Kshs. 45,287,108. 00. b.There was a variance of the salaries claimed against those indicated in the audited accounts amounting to Kshs. 4,857,320. 00. c.It had tried contacted suppliers and casual workers and as none of them confirmed their engagements with the appellant, the entire amount was disallowed and added back. The amount disallowed was Kshs. 12,187,933. 00d.The finance cost be disallowed as there were no documents provided to support the same.e.The total corporation tax due would therefore be Kshs. 21,227,169/=.

45. The Appellant averred that it strongly disputed the findings as they were hugely biased, unfair, ignored all the documents, meetings, inspections and interviews. That they were brought about in a haphazard manner seemingly to stop the Appellant from pestering it for closure on the long-standing audit.

46. That on 2nd June 2021, the Appellant provided a written response to all the preliminary findings which responded to the findings covering the period November 2014 to December 2019. That it disputed the findings and responded that:a.The respondent did not need to use the banking method to arrive at the income as the rental schedules and all supporting documents thereof were provided.b.The expected rent overstates and overestimates the rent expected and is practically impossible to achieve in the industry.c.Although it disagreed the use of the banking method, the method was still marred with errors, misjudgments and misinformation, which it failed to seek any clarifications on. That some of the errors in the banking method included;i.Failing to consider all non-cash expenses.ii.Not all monies received amount to income, such as tenant's refundable security deposits.iii.Funds injected by the Shareholders/Directors being treated as a taxable income.a.Salaries and wages were actual expenses incurred with the relevant supporting documents provided.b.Repairs and maintenance costs were actual expenses incurred with the relevant supporting documents provided.c.The finance cost was as a result of a loan taken before the audit period and moreover was a part of the documents illegally seized by the Respondent in 2011. 1.That the Respondent acted maliciously, in bad faith and in an unfair manner as it made findings on various aspects that were never queried on during the audit period and were arrived at without seeking any clarifications whatsoever from the Appellant. That throughout the audit period, the Respondent never asked the Appellant to:a.Provide any clarifications on its bank deposits,b.Explain how and why not all suppliers and workers could respond to the Respondent.c.Provide any clarifications on its employees and the salaries and wages that it claimed.2. That on 5th July 2021, the Respondent's officers called the Appellant with regards to its response on the findings. The Respondent asked the Appellant to avail itself for a meeting at its offices in Upperhill in order to explain its response and to agree on the way forward and to resolve the issue without the need to have a back and forth.3. That on 7th July 2021, the Appellant attended a meeting at Ushuru Pension Towers, Upper Hill offices in Nairobi and all the issues as set out in the letter of findings were discussed and resolutions on each finding arrived at. That it was agreed that the Appellant would submit the agreed documents and the Respondent would raise any pending queries it may have within 30 days thereof.4. That after waiting for the Respondent to raise any further clarifications it may have such that it may address the same together, the Appellant on 4th August 2021 submitted to the Respondent the agreed documents to address all the queries in the letter of findings, being:a.Tabulation of the loan repayments from 2015 to 2018 when the loa was fully repaid.b.Copies of the payroll/salary schedules from 2015 to 2019,c.P11 P.A.Y.E payment slips,d.P1OD P.A.Y.E quarterly returns,e.NSSF returns and payment slipsf.NHIF returns and payment slipsg.Muster roll books and salary payment vouchersh.Copies of the renovation permits from the County Government,i.Copies of the telegraphic transfers towards the repayment of the loansj.Letter of request to refund or carry forward overpaid taxes

51. The Appellant submitted that having provided all the documents and the necessary responses to address the findings by the Respondent, it wrote to it on various dates thereafter asking it for a final nil adjusted report as it was expected that all the issues were duly and properly addressed.

52. That on 8th December 2021, the Respondent raised a letter of assessment and assessment orders against the Appellant, bearing assessment numbers KRA202121384015,KRA202122337905, KRA202122337992, KRA202122338089 and KRA202122338168 totalling to Kshs. 38,330,963. 76 including penalties and interest for the accounting period January 2015 to December 2019.

53. The Appellant contended that the Respondent ignored all the documents provided to it, failed to mention them in its responses and ignored all resolutions of the Meeting of 7th July 2021. That the Respondent had at all times acted in bad faith and in a demeanor portraying unfair victimization of the Appellant and its related companies.

54. That the Respondent's assessment and the letter of findings were a copy of each other and had failed to consider the resolutions of the meeting of 7th July 2021, discussions, meetings and documents submitted throughout the audit and moreover against the resolutions of 7th July 2021.

55. That the Respondent's letter of assessment was similar to its letter of findings dated 11th May 2021 ignored the earlier sentiments, supporting evidence, documents and discussions between the parties in toto. it averred that the Respondent failed to give any reasons as to why its documents were ignored and how it concluded the exercise on a departure from the discussions it was having for almost two years.

56. That furthermore, despite the two documents being a reproduction of each other, the total tax payable differed in amounts in the respective tax computations.

57. The Appellant stated that it filed a notice of objection on 05th January 2022, objecting to the entire assessment amounting to Kshs. 38,330,963. 76. That it cited the reasons of objection, attached documents and referred to documents previously submitted to the Respondent.

58. That on 11th March 2022, the Respondent asked the Appellant once again for all the documents that it had always provided. However, the request came after the expiry of the statutory 60 days period contrary to Section 51 (11) of the Tax Procedures Act No. 29 of 2015.

59. The Appellant submitted that the Respondent having failed to render its Objection decision or any further communication within the Sixty (60) days mandatory period the Appellant’s objection was deemed allowed and the assessment therefore withdrawn.

60. That on 23rd March 2022, despite the Respondent's non-compliance to the Tax Procedures Act and whereas it should have deemed the objection as valid. the Respondent rendered upon the Appellant its Objection Decision as against the Appellant for additional income tax amounting to Kshs. 38,054,963. 91.

61. The Appellant stated it was aggrieved by the Respondent's Objection decision as the decision was grossly biased, generalized, arbitrary, excessive, unfair and against the rules of natural justice.

62. That the Respondent arrived at 3 different tax liabilities despite the substratum being the same across the findings, assessment and objection decision.

63. That it was evident from the chronology of events stated herein-above which portray a clear picture of the Appellant's willingness, support and co-operation throughout the audit. That it had on numerous occasions provided to the Respondent all the documents in support of its income and tax affairs but the Respondent had made an arbitrary objection decision and failed to consider the Appellant’s submissions and further failing to explain what information was missing if any. That the Objection decision had been made under duress and therefore haphazard and marred with misjudgments and errors.

64. The Appellant asserted that it was aggrieved by the Respondent's Objection decision finding that it understated its rental income by a total of Kshs. 45,287,108/= and wishes to rely on the following grounds:a.The Respondent arrived at its conclusion based on the expected Rental Income, and not on the, actual rental income in contradiction to the Appellant's filed accounts and further in contravention of Section 6(1) of the Income Tax Act which specifies that rental income is taxed on receipt and not on assumptions or estimations. That the Appellant's declared rental income. is supported by the tenancy agreements. rent receipts, rent schedules, iTax returns, financial statements and general ledgers as have been.b.The actual rental income is the true rental income earned by the Appellant and the same was supported by the rent schedules, tenancy agreements, rent payment receipts and other tenant documents.c.The Respondent in attendance with the Appellant visited its rental property on 3rd September 2020 and the same were compared to the filed returns. That the Appellant had no other sources of income to generate the alleged understated income. That the Appellant provided a summary of the actual rental income and other income, as supported by the relevant supporting documents.d.The Respondent in its assessment and subsequent objection decision claims to have used the Appellant's bankings and adding cash expenses to arrive at an alleged variance. That the said variance is marred with errors, misjudgments and unfair assumptions for the following reasons:i.The banking method (receipts) assumes that every deposit in the bank constitutes a taxable income. The Respondent failed to consider injection by the shareholders/directors totaling to Kshs. 33,710,000/= from 2015 to 2019. ii.The bankings include rents received in cash (Net of cash expenses) and cannot constitute as an additional rental income having already been declared as rental income received in cash. Such bank deposits are called contra entries and ought not to be misinterpreted as additional income received. All bank deposits are supported by deposit slips, which are completed by the Appellant's and/or its director, amounted to Kshs. 33,889,120/=iii.The banking method assumes that every deposit in the bank constitutes a taxable income. The Respondent failed to consider the 2-month equivalent refundable security deposit that tenants are required to maintain which amounted to Kshs. 3,552,000/= over the period 2015 to 2019. iv.The banking method assumed that all expenses are paid in cash and therefore failed to consider expenses paid through the bank. The Respondent failed to consider expenses paid through the bank amounting to Kshs. 7. 121. 090. 00. The expenses paid by the bank included:a.Statutory deductions on salaries such as Pay As You Earn (PAYE), NHIF and NSSF and amounted to Kshs. 1,046,993. 00. b.Salaries paid by cheque amounting to Kshs. 200,000. 00 in 2016. c.Payments made towards work permits for its employees and the employers contribution towards NSSF which amounted to Kshs.997. 850. 00 for the period 2015 to 2019. d.Administrative expenses paid through the bank/cheque and amounted to Kshs.4,876,247/=. The expenses included payments towards stationary, advertising, telephone and postage, legal and professional, bank charges, establishment expenses such as utility bills, land rent & rates and repairs, and maintenance expenses.v.The banking's are subject to erroneous credits by the banks then reversed and do not constitute as an additional taxable rental income. The erroneous credit amounted to Kshs. 9,900/= which the Respondent erroneously tallied as Kshs. 99,000/= in 2016. The Total bank deposits for 2016 were Kshs. 16,399,900/= and not Kshs. 16,489,000/=vi.The banking method failed to consider all non-cash expenses such as the finance cost, which constitute the interest charged on the loan and the foreign exchange gain/loss, a non-cash expense. The Respondent erroneously added the same in its working as a cash expense. The Respondent failed to consider the finance cost amounting to Kshs. 7,242,904/= for the period January 2015 to December 2019. vii.The correct banking method adjustments were provided vide the Appellant's objection to assessment letter dated 5th January 2022. a.The Respondent's decision to determine the Appellant's expected income by way of adding its total Bankings to its cash expenses and making adjustments towards other non-cash expenses is incorrect and flawed as the true and accurate method required for the Respondent to arrive at the correct expected income variance should have considered the entire cash and cash equivalents account. The Respondent's workings should have included the banking and the cash account for an accurate derivation.b.Despite the Respondent’s workings being incomplete and incorrect, the Appellant attempted to point out some of the discrepancies thereon and provide an adjusted working.c.The Appellant averred that the correct banking and expenses method should have considered the entire cash and cash equivalents (bank and cash) to deduce the correct expected rent. The Appellant provided a summary of the breakdown.d.The expected income finding by the Respondent was grossly overstated and was not in tandem with the site inspection of 2nd and 3rd September 2020 where the Respondent found that not all the apartments can be fully occupied over the 5-year audit period.e.The expected income finding by the Respondent was grossly overstated and was not in tandem with the legally binding tenancy agreements which provides for the monthly rent payable and runs for an 11-month term.f.The expected income finding by the Respondent was grossly overstated and was not in tandem with the site inspection of 2nd and 3rd September 2020 where the Respondent held interviews with the tenants and found that not all the houses can have the same rent and that they vary based on situations, negotiations and the market forces.g.The Respondent's Domestic Taxes Department, Real Estate Section looked at the Appellants records and made enquiries of the same nature herein and on 6th December 2018 confirmed that the Appellant's declaration of rental income was correct and that there was no under-declared income for the period January 2015 to December 2017. h.The Appellant has at all times submitted on the Respondent's iTax portal, details of its tenants as required by law and the details included the tenant's names, KRA PIN numbers, LR Numbers, physical address, postal address and the gross annual rent. Moreover, the declarations on the Respondent's iTax portal tally with those stated in Table A herein above.i.The Appellant has further in support of the declared rental income attached herein the receivables ledger indicating the rental income and sale of apartments funds received during the audit period from January 2015 to December 2019. j.The true and correct gross rental income earned by the company from January 2015 to December 2019 is therefore Kshs. 54,087,500/= as was declared on its filed returns.1. The Appellant stated that it was aggrieved by the Respondent's Objection decision finding that its entire claim for expenses were unsupported, as it was not confirmed by the suppliers/workmen and wishes to rely on the following grounds:a.That the Appellant's claims for expenses were fully supported with an official Receipt, cheque payment copies (where applicable), national identity card numbers and PIN numbers as required by law. That the Respondent had notice of the same.b.That the Respondent was supplied with a schedule and copies of every single receipt or voucher in support of its claim for expenses. The Respondent has notice of the same and allegations that the suppliers and workmen never responded are hearsay, not anchored in any law of the land and cannot therefore be a qualifying condition for claiming expenses under the Income Tax Act, Tax Procedures Act or any other provision of the law.c.That the expenditure incurred by the Appellant were necessary to maintain the property in a habitable and marketable status and critical in enabling the Appellant maintain its income.d.That the Appellant, in support of the expenses claimed, provided the Respondent the following;i. Spreadsheets of schedules of each individual expense incurred totalling to 2,391 entries of expenses.ii. Physical verification of the individual receipts, vouchers and contracts at the Appellants offices.iii. Bank statements showing payments towards expenses paid by cheque.iv. Renovation permits applied and obtained from the county governments as the works were being carried out from time to time.a.That the Respondent disallowing the Appellant's claimed expenses were grossly misinformed and were not in tandem with the site inspection of 3rd September 2020 where the Respondent saw and took photographs of the repair and maintenance works being carried out at the Appellant’s rental premises.b.That the Respondent's claim that the suppliers and workers carrying out the works did not provide responses/confirmations that they worked for the Appellant are neither here nor there as the Respondent's failure to receive a confirmation does not negate the fact that expenses were actually incurred. The same cannot be a basis of disallowing the same and are based on several factors as detailed in the minutes of the meeting of 7th July 2020 and as reiterated through its communications to the Respondent.c.That the Respondent disallowing the Appellant's claimed expenses were grossly misinformed and were not practically possible as no rental property can be maintained without the services of waste collection, plumbing repairs, electrical repairs, woodwork repairs and other day to day repairs of the premises in order to keep it serviceable for the general market.d.That the Respondent's Domestic Taxes Department, Real Estate section looked at the Appellants records and made enquiries of the same nature and on 6th December 2018 confirmed that the Appellant's claimed expenses were verified against the invoices and contracts and found to be fully supported for the period 2015 to 2017. e.That the Appellant's have incurred and have supporting documents towards its claim of repairs and maintenance expenses amounting to Kshs. 12,187,933. 00 for the period 2015 to 2019 and should therefore not be disallowed.1. Regarding unsupported salaries and wages, the Appellant stated that it was aggrieved by the Respondent's Objection decision finding that it had claimed for salaries and wages which were unsupported and wishes to rely on the following grounds:a.That the Appellant's claims for salaries & wages were fully supported and the Respondent had notice of the same.b.That the Appellant, in support of the salaries and wages claimed has provided the Respondent the following:i. Schedules of the employee schedules from 2015 to 2019ii. Duly signed petty cash vouchers on payment of salaries.iii. Payment of NSSF and NHIF for its employees from 2015 to 2019. iv. Copies of the Master roll books from 2015 to 2019. v. P11 & P10D payment slips for 2015 where employees’ payments were erroneously omitted from its findings.c.That the Appellant filed its PAYE returns through the manual filing system up to July 2015 and the Respondent failed to acknowledge the same by disallowing the manual returns. The Respondent did not have any grounds to disallow the same.d.That the Respondent only made consideration for employees within the PAYE tax bands of Kshs, 24,000/= and above and omitted those below the same and therefore arriving at an erroneous finding.e.That the Respondent disallowing the Appellant's claimed salary and wages expenses were grossly misinformed and were not in tandem with the site inspection of 3rd September 2020 where the Respondent saw and took photographs of the said workers at each premises.f.That the Appellant's incurred and have supporting documents towards its claim of salaries and wages expenses amounting to Kshs. 9,654,320. 00 which includes the amount disallowed by the Respondent amounting to Kshs. 4,857,320. 00 for the period 2015 to 2019. The Appellant hereby attached a summary of all the salaries and wages incurred for the period January 2015 to December 2019. 1.On the issue of unsupported finance cost, the Appellant averred that it was aggrieved by the Respondent's Objection decision finding that it had claimed finance costs which were not supported by any documents or evidence. That the same was untrue and the Appellant wished to rely on the following grounds:i.That the finance was acquired many years earlier to fund the construction of the Appellants rental property (the property herein) and the finance cost was brought about in the period 2015 to 2017 as it was being repaid to the lender.ii.That the Respondent was well aware that the finance was acquired many years back and the documents in support of the acquisition were illegally in the possession of the Respondent. The said issue had already been deliberated vide a Civil Suit no. 1108/2011 and the Respondent was expected to abide by the orders of the Honourable Court. The Respondent had never appealed against the order and as such remains in force and valid.iii.That the Appellant had provided all the relevant documents to prove that the loan was repaid and had provided the Respondent with the following:a.Copies of the telegraphic transfers when refunding the amounts.b.Copies of the Withholding Tax Certificates for the tax withheld on the interest paid.c.A statement of how the loan was refunded vide its letter of 4th August 2021. iv.That the Respondent's findings were erroneous as it had disallowed the finance cost twice in its workings. The first instance, when adding it back in the income tax working to compute expected rental income despite it not being a cash expense and the second instance by disallowing it in the tax computation.v.That the Respondent's Assessment and Objection Decision were malicious in disallowing the Appellant's finance cost but also failing to refund the Appellant the Withholding Taxes that were paid to it in lieu of the interest on finance.vi.That the Appellant therefore justified and is entitled to the claim of finance cost amounting to Kshs. 7,318,675. 00 for the period 2015 to 2019. 2.That ground 2. 1.4 of the Respondent's decision was erroneous as it claimed to have adjusted its findings where the Appellant provided documents and responses. The Appellant averred that the chronology of events clearly shows that the letter of findings, letter of objection and Objection decision were all based on the same narrative and arrived at the same conclusion.3. That the Respondent's tax computation as indicated in the summary of taxes failed to consider the over paid taxes brought forward to 2015 which amounted to Kshs. 954,936. 00 as at 31st December 2014. 4.That the Objection decision by the Respondent is fatally defective as it does not provide the statement of findings as required by the Tax Procedures Act, 2015. It stated that it neither refused to provide documents to the Respondent nor failed to cooperate with the Respondent and puts the Respondent to strict proof thereof.5. The Appellant contended that the letter of assessment ignored all the Appellant's sentiments, supporting evidence, documents and discussions between the parties in toto. It stated that the Respondent failed to give any reasons as to why its documents were ignored and how it concluded the exercise on a departure from the discussions it was having for almost two years.6. That it is trite law that the Respondent should always act in a fair manner and justify its actions and demands. That however, the Respondent proceeded to make unfair and unjustifiable demands then to hand the baton over to the Appellant under the pretext that the law requires it to prove the allegations as false.7. The Appellant stated that it was aggrieved by the Respondent's Objection decision as the decision was grossly biased, generalized, arbitrary, excessive, unfair and against the rules of natural justice.8. That it was evident from the chronology of events that the Appellant had on numerous occasions provided to the Respondent all the documents in support of its income and tax affairs but the Respondent made an arbitrary Objection decision and failed to consider the Appellant's submissions and further failing to explain what information was, missing if any.9. That the Appellant duly filed its tax returns in accordance with the provisions of the tax laws and the Respondent could not therefore purport to estimate/make its own best judgement on the taxes payable which it is only mandated to under the purview of Section 29 of the Tax Procedures Act.10. The Appellant averred that the Respondent had a legal obligation to, but had at all times failed to keenly complete the audit and the Appellant had to always prompt the Respondent to complete the audit and the Respondent only responded to the Appellant haphazardly and without consideration of the detailed information and documents it had always provided.11. The Appellant stated that it is trite law that the Respondent should always act in a fair manner and justify its actions and demands. That however, the Respondent proceeded to make unfair and unjustifiable demands then hand the baton over to the Appellant in a manner such as to frustrate the Appellant.12. The Appellant averred that it would raise a Preliminary Objection at the hearing of the case as the Respondent had issued an Objection decision outside the stipulated timelines as required by Section 51(11) of the Tax Procedures Act

Appellant’s Prayers 79. The Appellant prayed that;a.The Appellant’s objection dated 5th January, 2022 be upheld and allowed in its entirety.b.The Respondent’s letter of assessment dated 8th December 2021 amounting to Kshs 38,330,963. 76 together with any penalties and interest thereon be annulled and set aside in its entirety.c.The Objection decision by the Respondent dated 23rd March 2022 be annulled and set aside in its entirety.d.The Assessment Order reference numbers KRA202121384015 for 2015 for KRA202122337905 for 2016, KRA202122337992 for 2017, KRA202122338089 for 2018 and KRA202122338168 for 2019 be annulled, expunged from the iTax system and set aside in its entiretye.The Appellant's Objection be deemed allowed in line with Section 51(11) of the Tax Procedures Act.f.Pending the hearing and determination of this appeal, there be a stay affecting the implementation of the objection decision.g.The Appeal be allowed with costs to the Appellanth.The Honourable Tribunal makes any other order as it deems just and reasonable.

The Respondent’s Case 80. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated 3rd June 2022 and filed the same date together with the documents attached thereto.ii.The Respondent’s Statement of Facts (in response to Amended Memorandum of Appeal) dated 14th December, 2022 and filed on 15th December, 2022 together with the documents attached thereto.iii.The Respondent’s written submissions dated 28th December 2022 and filed on 3rd January 2023 together with the authorities attached thereto.

81. The Respondent stated that it carried out investigations on the Appellant for the period between January 2015 and December 2019 for Corporation tax and PAYE.

82. That the investigations carried out sought to establish the following:i.Whether the Appellant declared all taxable income earned for the period under review.ii.Whether Appellant accounted for all taxes due for the period under review.iii.Whether the Appellant and the directors deliberately committed an offence that warrants prosecution under the prevailing tax laws.iv.Assess, demand and collect taxes established from the investigations.

83. The Respondent averred that in carrying out the investigations, the Respondent sought and considered information and documents including the following:i.Appellant's filed tax returns, ledgers and data generated from Jaspersoft for analysis for the period under review.ii.Appellant's registration details (CR12) from the Registrar of Companies.iii.Copies of bank statements from various banks (Bank of Baroda Ltd -Sarit Centre Branch Acc. No. 95860200000068 and Prime Bank - Hurligham Branch Acc. No. 3000157392) to establish taxable income.

84. That the Respondent, having reviewed the Appellant’s tax compliance status, established that:a.Corporation tax - the Respondent noted that the Appellant had been filing returns consistently for the period under review.b.Value Added Tax (VAT) - The Appellant was not registered for VAT and offers residential rental services which are exempted from VAT.c.PAYE - The Appellant had been filing returns consistently for the period under review.d.Directors' Compliance - The Appellant's directors had been filing returns consistently.

85. The Respondent stated that it found that the Appellant had two registered directors as per CR 12 obtained namely: Jayesh Vijay Patel and Mundrika Rashmikant Patel.

86. That the Appellant earned rental income from Viraj Court Limited located in Kariaokor, Nairobi. That the Respondent’s officers visited the Appellant's property and they established the Appellant’s ownership.

87. That the Respondent considered the Appellant's banking information from the bank account statements obtained from Prime Bank Limited and Bank of Baroda Limited and established bank deposits amounting to Kshs 101,904,482. 00.

88. That the Respondent made comparison between bank deposits and income tax turnover and submitted as follows;a.That the Respondent compared the amount received in the bank and the amounts declared in the corporation tax return.b.That a review of the deposits made at Bank of Baroda revealed that the Appellant earned Kshs 98 Million for the period January 2015 to December 2019. c.That however, this figure differed from the turnover and proceeds or sale declared in the income tax returns for the same period. The total income declared in the income tax returns for the same period was Kshs 91 Million, therefore, the variance established (Kshs 6. 4 Million).d.That the Appellant explained that all the rent is collected in cash, however, not the whole amount was deposited into the bank account. It was noted that the taxpayer used the Bank of Baroda bank account to receive the proceeds from the sale of property.e.That therefore, although in some of the years, the amount in the bank was higher than that declared in the income tax return; the accuracy of rent income earned could not be established with certainty from the bank deposits.f.That to determine the accuracy of income declared in the income tax returns, the Respondent adopted the cash expense approach and the number of units approach.

89. Regarding cash expense approach, the Respondent averred that it assumed that the Appellant paid for the expenses from the cash received from the tenants then banked the balance. That therefore, to arrive at the annual rent income earned, the investigating team added the cash expenses to the bank deposits.

90. That adjustments were made for net debtors, proceeds from disposal of property and interest income and non-cash expenses like depreciation. Expected rental income was then compared to income declared in the income tax returns. That the variance established was treated as under declared income.

91. Regarding the number of units approach, the Respondent stated that it employed in determination of income earned was computing annual rental income based on the number of units and rate per unit for the period under review.

92. That the findings from the site visit confirmed that the Appellant under declared the rent earned by under declaring the number of units in the rent schedule.

93. The Respondent stated that it therefore estimated the rent payable per month for each house type based on the highest amount of rent charged for that particular year in computing the total rental income earned.

94. The Respondent stated that from the three approaches, it adopted the cash expense approach as it was more accurate than the number of units approach. That the challenges the Respondent encountered in the number of units approach was determination of the annual occupancy rate and the average rent per year.

95. That therefore, the variance established in the cash expense approach was added back in computing corporation tax due.

96. On the issue of Capital Gains Tax, the Respondent stated that the Appellant sold a total of five apartments between 2017 and 2018. That in the said period Capital Gains Tax was chargeable. That data extracted from the DWBI tool and from iTax match the sale agreements provided. It averred that the data also show that the Appellant accounted for and made payments for Capital Gains Tax.

97. Regarding expenses claimed on building repairs the Respondent averred that the Appellant availed copies of general ledgers that gave a breakdown of the expenses claimed in the income tax returns.

98. That from the ledgers availed, the Respondent noted that the Appellant claimed painting, masonry, plumbing, electrical, metal and woodwork expenses on a monthly basis. That these amounts included wages to casual labourers. The Respondent contended that this was not normal for a taxpayer operating in real estate sector because such expenses are incurred when you get new tenants and not on a monthly basis.

99. That in order to establish whether the amounts claimed were correct, the Respondent physically verified the expenses claimed on a sample basis. That the Appellant presented invoices and the Respondent sought to verify their validity by obtaining confirmation from their said suppliers.

100. That it established that the alleged repairs and maintenance cost, made in cash and could not be traced to any payments from the bank statements, were not proven. The Respondent therefore concluded that the Appellant had over claimed expenses so that it can reduce tax payable and consequently disallowed the total cost claimed as building repairs.

101. The Respondent stated that the Appellant presented invoices that were fictitious. That this buttressed by the fact that none of the suppliers confirmed ever making a supply to Appellant for repairs or any maintenance. That it was therefore justified in disallowing the repairs and maintenance costs claimed by the Appellant.

102. That in addition, the Respondent sought to verify whether the amount claimed to have been paid to the casual labourers was indeed claimed correctly. On this the Respondent averred that it contacted casual labourers and none confirmed ever working there for the period under review.

103. The Respondent further established that he alleged payment to suppliers and labourers were made in cash and the Respondent could not trace any payments from the bank statements

104. That the Respondent therefore concluded that the Appellant over claimed expenses so that it can reduce tax payable. The Respondent therefore disallowed the total cost claimed as building repairs. That the disallowed costs were added back in computing corporation tax due.

105. Regarding salaries and wages, the Respondent stated that a review of the PAYE returns established that the Appellant had only four employees annually. That payments made to the other employees ranged from Kshs 20,000 to Kshs 38,000 for the period under review.

106. It averred that to confirm accuracy of amounts claimed in the returns, the Respondent compared salaries paid to the employees to the figures claimed in the audited accounts and the variances established was treated as over claimed expenses which were added back in computing corporation tax.

107. On finance cost the Respondent averred that in the audited accounts, the Appellant claimed loan interest and foreign exchange loss under finance costs in 2015, 2016 and 2017.

108. That the Respondent requested for documentation supporting the loan and the Appellant responded in a letter dated 7th September 2020 stating that the Appellant does not have any loans but has amounts owed to the directors/shareholders. That however, no supporting documents were provided. This expense claimed was therefore added back and charged for income tax as shown in the tax computation.

109. That upon conclusion of the tax investigations, the Respondent communicated its findings to the Appellant through a letter dated 11th May 2021 which established tax due as Kshs. 21,227,169.

110. On Corporation tax, the Respondent averred that the Appellant, based on several grounds, disputed the Respondent's findings through a letter dated 2nd June 2021 objecting the Respondent's investigations findings in totality.

111. That it considered the Appellant’s objection to the findings and made the necessary adjustments. It averred that in order to determine expected income, income received in cash was added to bank deposits and adjustments made. That the computed expected income was then compared with turnover declared to obtain undeclared income.

112. The Respondent submitted that it consequently on 8th December 2021 issued a tax assessment of Kshs. 38,054,963. 91 on Corporation tax only. That in response, the Appellant lodged its notice of nbjection on 5th January 2022.

113. That on 4th March 2022, the Respondent wrote to the Appellant in relation to its notice of objection and requested the Appellant to submit some documentations and information for the Respondent's review before an objection decision was rendered.

114. That in response to the Respondent's letter of 4th March 2022, the Appellant wrote a letter dated 17th March 2022. That the Respondent considered the grounds raised in the notice of objection, the documentations and further information provided in support and issued its objection decision on 23rd March 2022 confirming the tax assessment of Kshs 38,054,963. 91.

115. Regarding the Appellant’s averment that the objection decision was issued out of time, the Respondent further reiterated as follows;i.That the Respondent was not aware of any communication issued to the Appellant on 11th March 2022. That however, on 4th March 2022 through a letter of even date sent on Appellant's registered mail, the Respondent sought further information and documents from the Appellant. That the information sought included rent payment receipts, occupancy summaries of the units, documents to support expenses amongst others.ii.That in response to the Respondent's letter sent on 4th March 2022, the Appellant wrote a letter dated 17th March 2022. In the said letter, the Appellant provided no further documentation as requested and consequently, the Respondent issued an Objection decision on 25th March 2022 confirming the assessment.iii.That the Appellant's letter dated 17th March 2022 was the last further information received from the Appellant before the objection decision was rendered. That therefore, the sixty days within which the Respondent was required by law to render the decision started running upon receipt of the Appellant's letter i.e from 17th March 2022. iv.That the Respondent's Objection decision issued on 25th March 2022 was in line with Section 51(11)(b) of the Tax Procedures Act, 2015 which provides that:- "(11) The Commissioner shall make the objection decision within sixty days from the date of receipt of ... (b) any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed."v.That the Respondent also relied on the Judgment of this Honourable Tribunal in· Stuntwave Limited vs Commissioner of Investigations and Enforcement, Nairobi Tax Appeals Tribunal Appeal No. 279 of 2021. vi.The Respondent therefore averred that Objection decision issued on 25th March 2022 is valid under Section 51(11)(b) of the Tax Procedures Act, 2015 and not late as alleged by the Appellant.

116. The Respondent submitted that it considered all the Appellant's submissions in interviews, review meetings, site inspections, document verification meetings and documentations provided.

117. That even though the Appellant alleged that these submissions were not considered, it has failed to provide the list of the documents or submissions which the Respondent ignored. That this ground as it is, is very vague and thus not valid because it is not backed by any proof or evidence.

118. The Respondent stated that the Appellant had under declared income earned by under declaring the number of units in the rent. That further, the Respondent established that the Appellant paid for the expenses from the cash received from the tenants then banked the balance and therefore, to arrive at the annual rent income earned, the Respondent added the cash expenses to the bank deposits.

119. The Respondent stated that it also adjusted the net debtors, proceeds from disposal of property and non-cash expenses like depreciation. That the expected rental income was then compared to income declared in the income tax returns and the Respondent noted variance of Kshs. 45,287,108. 00.

120. That from the above, it was apparent that the Respondent made necessary adjustment to the bank deposits and deducted the non-revenue entries.

121. It averred that whereas the Appellant alleged that the net income arrived at did not factor in items such as shareholders' injections, tenant's non-refundable security deposits, there is no supporting documents to prove the same. That where the Appellant proved the expenses and non-revenue entries, the Respondent allowed the same as shown in the tax computations. That the Appellant's allegations that the Respondent made fundamental errors is without basis and is not supported and same should be dismissed.

122. The Respondent maintained that the Appellant did not sufficiently prove all the expenses and hence the Respondent's reliance on any other information available at its disposal and the best of its judgment to determine the Appellant's tax liability pursuant to Section 31(1) of the Tax Procedures Act, 2015.

123. The Respondent further stated that the Appellant in the amended Statement of Facts was introducing a fresh ground and new facts which were never brought to the Respondent’s attention nor were considered by the Respondent in raising the assessment and during the objection review stage.

124. That in doing so, the Appellant was arguing a new case in the Appeal with a view of patching up its case, after realizing the weakness it has contrary to procedural law and law of evidence.

125. Regarding unsupported finance cost the Respondent added that the Appellant had claimed that it had amounts owed to the directors/shareholders, however, no supporting documents were provided. That in the years 2015, 2016 and 2017, the Appellant claimed a finance cost of Kshs. 5,695,785. 00 under net foreign exchange loss and loan interest of Kshs. 1,622,890. 00.

126. That the Respondent requested for documentation supporting the loan to which the Appellant responded in a letter dated 7th September 2020 stating that it had no external loans. That the Respondent therefore added back the expense claimed and charged for income tax. It averred that in the absence of the supporting documents, the Respondent was justified to disallow the expenses claimed.

127. That in introducing new annexures in the Amended Memorandum of Appeal, the Appellant was introducing fresh evidence which were never availed to the Respondent for consideration in raising the assessment and during the objection review stage.

128. That in doing so, the Appellant was arguing a new case with a view of patching up its case, after realizing the weakness it has contrary to procedural law and law of evidence.

129. The Respondent contended that it reviewed and examined all the documents provided by the Appellant regarding the inflows in its accounts and made adjustments for non-cash expenses such as depreciation. That the claimed costs relating to PAYE and repair and maintenance costs were disallowed.

130. The Respondent stated that it also reviewed the Appellant's PAYE returns in order to establish the accuracy of the amount claimed as salaries and wages expense. That the Respondent also compared salaries paid to the figures claimed in the audited accounts and the variance of Kshs. 4,857,320. 00 established was treated as over claimed expenses, which were then added back in computing Corporation Tax.

131. That it was the Respondent's position that Section 15 of the Income Tax Act provides for allowable expenses. That it is a general accounting principle that expenditures must be supported with evidence to ensure they are verifiable. It averred that in the Appellant's case some of the costs associated with repairs of buildings, finance costs and over claimed expenses were disallowed.

132. It contended that this was contrary to the provisions of Section 54A(1) of the Income Tax Act that requires the Appellant to keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds and contacts and vouchers which in the opinion of the Commissioner are adequate for the purpose of computing tax.

133. The Respondent urged the Tribunal to find that the Amended Memorandum of Appeal was the Appellant's way of patching up the weak points laid bare by the Respondent's Statement of Facts dated 3rd June 2022 and thus the Appellant was seeking to introduce a new case in the Appeal.

134. The Respondent invited the Tribunal to find that the minutes adduced by the Appellant were drafted and only signed by the Appellant, without evidence of the same having been shared with the Respondent to confirm its content.

135. That the Appellant's Appeal was not supported by documentary proof showing why the Respondent's assessment and objection decision is erroneous and instead, the Appellant had only attached documents showing a chronology of events without the evidence.

Respondent’s Prayer 136. The Respondent prayed that the Tribunal:i.Upholds the objection decision of 23rd March 2022 as valid and in conformity with the provisions of the law.ii.Finds the Appeal herein is without merit and dismiss it with costs to the Respondent.

Issues for Determination 137. The Tribunal upon due consideration of the pleadings and the written submissions filed on the separate parts of the parties was of the considered view that the Appeal herein raises the following issues for its determination;a.Whether the Appellant’s Notice of Objection was allowed by operations of the law.b.Whether the Respondent erred in its assessment of tax on the Appellant.

Analysis And Findings 138. The Tribunal having identified the issues falling for its determination proceeded to analyse and make findings on the issues separately as hereunder:-a.Whether the Appellant’s Notice of Objection was allowed by operations of the law.

139. The genesis of this dispute was the Respondent’s objection decision dated 23rd March 2022. Before delving into the issue in dispute, the Tribunal notes the following key correspondences in this case;a.The Respondent’s assessments orders issued online on 7th December 2021 and via a letter dated 8th December 2021. b.The Appellant objected to the assessments vide a letter dated 5th January 2022 and received by the Respondent on the same date.c.The Respondent’s letter dated 4th March 2022 requesting for additional documents (date of receipt thereof by the Appellant now in dispute)d.The undated Appellant’s reply to the letter dated 4th March 2022 and received by the Respondent on 17th March 2022. e.The Respondent’s objection decision dated 23rd March 2022.

140. It was the Appellant’s contention that the Respondent had issued an objection decision outside the stipulated timelines as required by Section 51(11) of the Tax Procedures Act.

141. The Appellant stated that on 11th March 2022, the Respondent asked the Appellant for all the documents that it had always provided. That however, the request came after the expiry of the statutory 60 days’ period contrary to Section 51 (11) of the Tax Procedures Act No. 29 of 2015.

142. The Appellant submitted that the Respondent having failed to render its objection decision or any further communication within the Sixty (60) days mandatory period the Appellant’s objection was deemed allowed and the assessment therefore withdrawn.

143. The Appellant further urged that on 23rd March 2022, despite the Respondent's non-compliance with the mandatory provisions of the Tax Procedures Act and whereas it should have deemed the objection as valid, the Respondent rendered upon the Appellant its objection decision as against the Appellant’s objection to the additional income tax amounting to Kshs. 38,054,963. 91.

144. The Respondent on the other hand stated that it was not aware of any communication issued to the Appellant on 11th March 2022. That however, on 4th March 2022 through a letter of even date sent on the Appellant's registered mail, the Respondent sought further information and documents from the Appellant. That the information sought included rent payment receipts, occupancy summaries of the units, documents to support expenses amongst others.

145. That in response to the Respondent's letter sent on 4th March 2022, the Appellant wrote a letter dated 17th March 2022. That in the said letter, the Appellant provided no further documentation as requested and consequently, the Respondent issued the objection decision on 23th March 2022 confirming the assessment.

146. That the Appellant's letter dated 17th March 2022 was the last further information received from the Appellant before the objection decision was rendered. That therefore, the sixty (60) days within which the Respondent was required by law to render the decision started running upon receipt of the Appellant's letter i.e from 17th March 2022.

147. The Commissioner is enjoined under Section 51(11) of the Tax Procedures Act to make an objection within 60 days from the date of receipt of:-“a)the notice of objection; orb)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”(Emphasis added)

148. The Tribunal perused through the submissions of the parties and noted that it was not in dispute that the Appellant lodged its notice of objection on 5th January 2022. Going by the provisions of Section 51(11) of the TPA the Respondent ought to have issued the objection decision on or before 4th March 2022 if it did not ask for any additional documents or information from the taxpayer prior to the lapse of sixty days.

149. In the instant case the Tribunal noted that there was a letter attached by both parties from the Respondent dated 4th March 2022. The Appellant however insisted that the letter was served on it on the 11th March 2022 outside the statutory timelines for issuing the objection decision.

150. Section 74(1) of the Tax Procedures Act provides as follows regarding service of notices by the Commissioner;“Except as otherwise provided in a tax law, a notice or other document required to be served on, or given to, a person by the Commissioner under a tax law may be served or given by—(a)delivering it to the person or the person's tax representative;(b)leaving it at, or sending it by post to, the person's usual or last known place of business or residence; or(c)transmitting it in electronic form.”

151. Going by the above provisions of the law, the Respondent ought to have demonstrated by way of documentary evidence that it indeed served the taxpayer with the letter of 4th March, 2022 using any of the three specified ways provided by the law.

152. In the instant case the Tribunal noted from the Respondent’s Statement of Facts that although the Respondent had stated that the said letter of 4th March 2022 was served on the Appellant through a letter of even date sent on Appellant's registered mail, no documentary evidence was provided to support this averment. The Appellant on its part attached the same letter to its Memorandum of Appeal where it indicated on it that it received the same on 11th March 2022.

153. It was the view of the Tribunal that the Respondent’s averments that it had served the Appellant with the letter by mail on 4th March 2022 was not enough to prove its argument as set out in Section 107 of the Evidence Act which provides that:“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”

154. The Tribunal in the circumstances finds that the Respondent had failed to demonstrate that it indeed served the Appellant with any letter on 4th March 2022.

155. Consequently, the Tribunal determined that the Respondent’s letter dated 4th March 2022 was served on the Appellant on 11th March 2022 which was outside the timelines allowed by law for issuance of a decision by the Respondent.

156. The Tribunal was guided on strict compliance with statutory provisions by the decision in Nicholas Kiptoo Arap Korir Salat v IEBC & 6 Others [2013] eKLR where the court stated as thus;“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned…”

157. This principle was well articulated by the Court of Appeal in Speaker of National Assembly vs. Njenga Karume [2008] 1 KLR 425, where it held that;“In our view there is considerable merit.....that where there is clear procedure for the redress of any particular grievance prescribed by the Constitution or an Act of Parliament, that procedure should be strictly followed.”

158. Similarly, in Equity Group Holdings Limited-vs-Commissioner of Domestic Taxes [2021] eKLR, the High Court held, at Paragraphs 52 and 53 that:-“52. Parliament in its wisdom deployed the word “shall” twice in section 51(11). The provision reads “The Commissioner shall make the objection decision within sixty days from the date of receipt of— (b) any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.53. The classification of statutes as mandatory and directory is useful in analyzing and solving the problem of the effect to be given to their directions. There is a well-known distinction between a case where the directions of the legislature are imperative and a case where they are directory. The real question in all such cases is whether, a thing, has been ordered by the legislature to be done, and what is the consequence, if it is not done. The general rule is that an absolute enactment must be obeyed, or, fulfilled substantially. Some rules are vital and go to the root of the matter, they cannot be broken; others are only directory and a breach of them can be overlooked provided there is substantial compliance.”

159. Accordingly and as provided for under Section 51(11)(b) of the Tax Procedures Act, the Tribunal finds that the Appellant’s notice of objection dated 5th January 2022 was properly deemed to have been allowed by operation of the law.

Final Decision 160. The upshot of the foregoing is that the Appeal is merited and succeeds. The Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed,b.The Objection decision dated 23rd March, 2022 be and is hereby set aside,c.Each party to bear its own costs.

161. It is so ordered.

DATED and DELIVERED at NAIROBI on this 26th day of May, 2023ERIC N. WAFULA- CHAIRMANCYNTHIA MAYAKA - MEMBERGRACE MUKUHA - MEMBERABRAHAM KIPROTICH - MEMBERJEPHTHAH NJAGI - MEMBER